Some city workers, retirees could face big pension bill

At issue is the purchase of service credits at reduced rates

Overview

Background: The city began allowing its workers to buy extra years of credited service in 1997. The pension board raised the price in 2003 but not before allowing a brief window for workers to buy years under a cheaper rate.

What’s changing: An appeals court ruled the board violated the law and ordered pension officials to correct the mistake without taxpayer money. About 2,200 workers may have to accept reduced pensions or pay a lump sum.

Future: The City Council has until the end of January to decide whether to exempt some or all of the workers by placing the financial burden on taxpayers.

About 2,200 current and retired San Diego city workers find themselves in a financial bind because of a seven-year-old decision they made to pad their pensions through a special program that allowed them to buy additional years of service that they never actually worked.

Now each of those workers — including roughly 500 who have already retired and live on fixed incomes — may be forced to accept significantly reduced pensions or pay a lump sum of as much as $50,000 to keep their current pension.

An appeals court ruled in June that pension officials illegally allowed those workers to buy extra years in 2003 at a rate far below what they knew the program cost. The pension board delayed implementation of a new higher rate for nearly three months and workers proceeded to spend $144 million on extra years valued at $227 million.

That decision, which the court ruled the board had no authority to make, coupled with subsequent overpayments to pensioners, left taxpayers on the hook for an unfunded liability of $100 million, a portion of the city’s overall $2.1 billion pension deficit. The court ordered the pension system to fix the error and prohibited it from charging the city for the mistake.

Now the City Council has until the end of January to decide whether to exempt some or all of those workers from paying for the mistake and use taxpayer money to correct the problem. If the city does nothing, pension officials said they would move forward with readjusting benefits or force affected workers to pay out of pocket to keep their existing pensions.

Retirees and union leaders told the council at a hearing last week they would likely sue if any changes are made. They contend workers bought credits at the urging of city and pension officials and made retirement decisions based on what they were promised.

“You have never once as an employer told employees don’t do this, these contracts aren’t valid,” said Ann Smith, attorney for the city’s white-collar union. “You think it’s OK now in 2010 just to sit here and act like you’re going to do some benign correction. You are going to rip people’s hearts out.”

Not everyone is sympathetic and there’s a question of whether any fix that involves taxpayer money would constitute an illegal gift of public funds. Councilman Carl DeMaio said the pension board knowingly underpriced the program at the expense of taxpayers and workers shouldn’t benefit by getting more than they paid for.

“You telegraphed for three or four months that ‘Guess what? They’re actually going to charge you the real rate so buy’em while they’re hot,’” he said.

The benefit at issue is called the “purchase of service credit” program, which was enacted in 1997 under then-Mayor Susan Golding. Employees can buy as many as five additional years of service that they didn’t work. For example, a 15-year worker could retire with 20 years of credit. The move significantly increases future pension payments and, in some cases, allows workers to retire earlier.

The problem is the pension system wasn’t charging workers enough for the credits. An actuary estimated the city’s pension deficit increased by $12.7 million from 1997 to 2003 because of the underpricing.

The pension board voted on Aug. 15, 2003, to increase the rates but delayed implementation until Nov. 1. Word spread quickly and nearly as many people bought credits in that brief window as in the previous six years combined.

Once the change went into effect, the cost to buy a single year increased from 15 percent to 27 percent of an individual’s annual salary for general workers. The rate for public safety workers jumped from 26 percent to 37 percent. The difference in many cases was several thousands of dollars.

Of the 2,200 workers who bought credits, they spent an average of $65,500 each when the true cost was closer to $103,200.

Former City Attorney Michael Aguirre sued the pension system over the issue in November 2007 so anybody who retired after then is subject to the appellate court’s ruling.

Some of the retired workers say they can’t afford to pay any more money and will struggle to survive if their pensions are reduced.

Ruth Donovan, 67, said she wasn’t aware of the litigation and possible changes to her pension until after she retired last year.

“I almost had a heart attack,” she told the council at a hearing last week. “Since then, I have had many sleepless nights. I will not be able to live if you cut anything from my pension. Hundreds of women who work for the city in offices have small salaries and small pensions. ... I beg you to at least leave the retirees out of this mess.”

Margaret Glaser, 63, a biologist in the city’s water department, said she needs the extra years she purchased to be eligible to retire later this month as planned. She said she hasn’t been told how changes would affect her pension and is frustrated with city and pension leaders for misleading her.

“It’s not fair. ... I wish the politicians would stop using the employees as the whipping boy for their mistakes,” Glaser said.

Given the likelihood of litigation, council members have requested a cost-benefit analysis be performed by the City Attorney’s Office and the independent budget analyst before any decision is made.